The race is on.
Blockchain is still a developing technology and dominated right now by an enthusiastic but often amateur fan base. The race is to bring it out of the garage and into real commercial utility. A lot of money is going to be made. It’s my job to figure out how best to do that.
There is no doubt the blockchain sector is going to grow and become ubiquitous over the next decade. That’s exciting stuff, but there are so many exciting stories out there. How can we be confident this will be a big one?
The answer is very simple. It’s going to result in massive cost savings for all financial transactions. It could do away with the need to keep paper copies of anything. It will facilitate the migration of our medical records from a dusty basement onto our smart phones.
How do I know? That’s a great question, but let’s first ruminate on how we understand a problem from every perspective. Empathy is one of the most useful skills any of us can wish to develop. The reason is that it gives us some understanding of just what kinds of problems others face, and as a result we get to think about how we can create solutions. This is particularly true when we are trying to figure out what might happen in a developing technology. It really helps to understand someone else’s perspective when you are trying to figure out how they experience the world or the regulatory environment and what they are going to do to solve the challenges they face.
Blockchain banking
Look at the banking sector, not just in the UK but globally. It’s a mess. Customers are not happy. They’ve seen the cost of just about every other service they receive come down, but banking fees have actually gone up. Banks took a lot of the blame for the economic difficulties that followed the credit crisis, and with good reason. The result is the cost of complying with reams of new regulations has ballooned, and they are restricted in how much of these new costs can be passed on to consumers.
Despite the fact earnings have recovered as a result of the ultra-low interest rate, environment banks are going to have a hard time raising dividends because of the new cost structure they perform in. From the outside it is tempting to think they deserve everything they get. However, if we put ourselves in their shoes, the financial sector needs something revolutionary to reduce the cost of doing business. Blockchain is the answer.
The Clearing House Automated Payment System (CHAPS) was set up in the UK in 1984, and you’ll be familiar with it if you have ever had to transfer money between accounts at different banks. It’s convenient compared to waiting three days for a cheque to clear and can be done over the phone, but it isn’t instantaneous and only works within the UK. Even more importantly the UK has a relatively advanced financial system compared to the rest of the world, which doesn’t even have a CHAPS system.
Let’s take it a step further
If you buy shares in the stock market it takes three days to settle, which in today’s world is a heresy of sluggishness. That’s especially true when high frequency traders are firing off thousands of trades in fractions of a second. The nitty gritty of recording trades, updating the shareholder registry and making sure the right people get their dividends is cumbersome and more importantly, expensive. Stock exchanges would love to be able to streamline the whole process and do so in a secure environment.
Cybercrime is running rampant, and credit card companies have to insure payments made using their products. Any actuary will tell you that the premium rises as the risk increases and cybersecurity is a major cost centre for credit card companies. What would they pay to reduce those insurance premiums?
Blockchain is a potent solution to these issues, and companies have no choice but to embrace innovation. That is why companies like Chain (a start-up based right here in California) has had major multinationals queueing up to work with it. A former CEO of American Express is heading up the company, and it is racking up major financial organisations as customers at a rapid rate. Nasdaq, Visa, Citi Ventures, Capital One, Fiserv and Orange have already invested $30 million in Chain.
First Data
But those major firms were joined by another firm. It’s one you’ve probably never heard of. But I think it’s well worth a place on your “watch list”. It’s called First Data. I mention it here because it cuts through two of the themes I’ve identified as important for 2016: blockchain and artificial intelligence.
First Data was the biggest initial public offering (IPO) of 2015 and received little fanfare because of what is going on in the wider market. It has six million merchant customers, which is more than any other payment provider, and was IPOed by Kohlberg Kravis Roberts (KKR) in October. It has encountered competition on its home turf, has struggled to reinvent itself and churned through CEOs until 2013. And it has been a headache for KKR but they finally secured a management team with JPMorgan Chase pedigree in 2013, which has whipped the company into shape and allowed it to be listed.
First Data is in the middle of a massive reorganisation that will focus on providing the type of big data intelligence solutions to its small to medium sized business customers, which previously only Google and Amazon would have had access to. This is a wonderful value proposition, but it’s not all the company is offering.
First Data acquired Gyft last year, which is a company that allows users to purchase gift cards with bitcoin and to spend them at a host of venues. First Data acquired it for the gift card business but is actively exploring how to use the blockchain to evolve the security used to protect customer data.
It’s certainly an interesting situation
And if First Direct can develop its offering enough, there could be big money to be made. But there are a few things I’d like to see before I pull the trigger.
First Data was saddled with a lot of debt following its acquisition by KKR, and that represents a headwind for the company. It also makes the new management team hungry for solutions that will further its objective of returning to the consistent growth shareholders they had been accustomed to before it was taken private. As a BB bond issuer, perhaps the greatest challenge facing the company is to reduce the interest expense on its outstanding debt. That feat alone would translate into shareholder value.
The share is down about 20% since its IPO, and it is probably too early to jump in but First Data is exactly the kind of company to keep an eye on – because when it gets the right product mix, it could really shine and will exemplify the promise of blockchain and big data.
Category: Investing in Bitcoin